Vodafone deal: 'Short-term gain, long-term pain for dividend seekers'

An investor holding £5,000 of Vodafone shares may receive £2,000 in special
dividends – at the cost of lower annual payments in future.

Investors are set to receive a dividend windfall after Vodafone last night reached an agreement to sell its 45pc stake in US mobile firm Verizon Wireless, but its longer term income outlook is under threat.

Vodafone Group

After months of speculation, the partnership’s majority owner Verizon Communications signed off the sale of their joint venture, Verizon Wireless, in a deal worth £84bn.

The deal represents a bumper payday for shareholders, with £54.3bn sent back to Vodafone investors, including the roughly 500,000 retail investors that Vodafone has in Britain.

According to broker Hargreaves Lansdown an investor holding £5,000 of Vodafone shares might receive £2,000, with no further tax to pay if held within an Isa or Sipp, added the broker.

Adrian Lowcock of Hargreaves Lansdown said: “The size of the transaction is huge and shareholders could be in line for a big payout. When looking at investing for income it is important to focus on a stable income and the ability for that income to grow.”

Vodafone is a favourite with UK equity income fund managers, meaning investors in this type of fund will benefit. Legal & General, Scottish Widows and Fidelity have large stakes in the company.

Shares in the stock leapt to an 11-year high last week on the back of Vodafone confirming it had reopened negotiations on selling its stake in Verizon Wireless.

Short-term gain but long-term pain?

Vodafone was the top dividend payer in the UK market in 2012, but its status as an income darling stock will be under threat if the deal goes ahead.

In 2012 the firm’s dividend payout accounted for over 3pc of the FTSE 100 total, but this was largely because it paid out a large special dividend – £6.1bn – from its stake in Verizon Wireless.

The proposed sale will drastically reduce Vodafone’s size and ability to pay out such high levels of income.

Justin Cooper, chief executive of Capita Registrars, said: “The Verizon deal may provide short-term gain, but longer-term pain for investors in Vodafone. The initial deal is likely to represent a dividend bonanza, and investors will expect to see a sizeable chunk of the sale proceeds.

"Vodafone was the biggest contributor of dividends last year, accounting for nearly one pound in every £11 paid out by UK plc. But the situation is more complicated in the longer term, and investors may face a sting in the tail if the deal – and loss of revenue from Verizon – affects the company’s ability to maintain the current level of payouts.

"Mergers and acquisitions are often used by companies as a chance to review their long-term dividend strategy, and this may well be the case with Vodafone.”

Analysts at Bernstein added that they expected Vodafone to pursue further investments in the coming years, a move which could result in the firm paying lower dividends.

“If a deal has got this far it is only because there is a plan for next steps. We expect an approach balanced between medium-term shareholder remuneration (share buy-backs and dividends), further investments (higher capital expenditure and more acquisitions) and reduced debt,” said the analysts.

There are plenty of alternatives investors can turn to if Vodafone is forced to lower its dividend payments. Here our guide reveals which UK shares pay the safest dividends.